Did Public Law 86-272 protect an out-of-state insurance underwriter whose employee solicited policies from an Illinois home office?

Plain-English summary

Public Law 86-272 did not protect the insurance underwriter's Illinois activity. The federal statute protects limited solicitation of orders for tangible personal property when the orders are approved and filled from outside the state.

The company sold and administered medical stop-loss insurance, which IDOR treated as intangible property. Its Illinois employee solicited policy business from a home office. Because the activity involved insurance rather than tangible personal property, it was outside Public Law 86-272 even if the employee did not accept orders or set prices.

IDOR concluded that the company was liable for Illinois income tax on income allocated or apportioned to Illinois under Section 304. The GIL separately noted that a corporation authorized to do business in Illinois and required to file federally had an Illinois filing duty even without Illinois tax liability.

What this means for you

Do not apply Public Law 86-272 merely because an in-state employee performs solicitation only. The protection also depends on selling tangible personal property and satisfying the statute's other limits.

Common questions

Q: Did the employee's lack of order or pricing authority preserve protection?
A: No, because the solicited product was insurance, not tangible personal property.

Q: What income did IDOR say was taxable?
A: The company's income allocable to Illinois under Section 304.

Citations and references

• 15 U.S.C. § 381
• 35 ILCS 5/201, 304
• 35 ILCS 5/502(a)(2)
• 86 Ill. Adm. Code 100.9720(c)(2)(B)(i)

Subject

Public Law 86-272/Nexus

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0029.pdf

Original ruling text

IT 12-0029-GIL 10/05/2012 Public Law 86-272/Nexus
General Information Letter: Sales activities conducted within Illinois by employees of
the taxpayer with regard to insurance policies are not protected under Public Law 86272.
October 5, 2012
Dear:
This is in response to your letter dated July 24, 2012 in which you state the following:
This letter serves as a request from a corporation (“Client”) that is interested in a nexus
determination, and, if appropriate, initiating estimated tax payments for 2012. It is my
understanding that my client may proceed with a no-names nexus determination and then
either obtain a named ruling or proceed to voluntarily filing an Illinois tax return for 2012. The
facts relating to Client are as follows.
Client is a C-corporation that is incorporated in the state of Connecticut. Client has a calendar
year-end.
Client is a managing general underwriter, specializing in the marketing,
underwriting, pricing and administration of medical stop loss insurance. Client is not required
to hold a license to do business in Illinois.
In 2012, Client employed a salesperson in Illinois, who works from a home office. The
employee’s sole function is to solicit business using his/her personal equipment to call on
potential customers. He/she does not accept orders or price products. Those functions, as
well as all other functions, are conducted in Connecticut. At this time, it is unclear whether this
person will be retained beyond 2012.
Client does not have any property (real or personal) in Illinois.
Client has earned fees from policies which are held by policyholders in Illinois. Client
estimates federal taxable income (loss) before NOL or special deductions, on a separate
company basis, of ($13,000,000) in 2012.
Client has asked me to contact you on a confidential basis to explore securing a nexus
determination.
According to the Department of Revenue (“Department”) regulations, the Department may issue only
two types of letter rulings: Private Letter Rulings (“PLR”) and General Information Letters (“GIL”).
The regulations explaining these two types of rulings issued by the Department can be found in 2
Ill.Adm.Code §1200, or on the website http://www.tax.illinois.gov/LegalInformation/regs/part1200.
Due to the nature of your inquiry and the information presented in your letter, we are required to
respond with a GIL. GILs are designed to provide background information on specific topics. GILs,
however, are not binding on the Department.
Section 201 of the Illinois Income Tax Act (“IITA;” 35 ILCS 5/101 et seq,) imposes a tax measured by
net income on taxpayers for the privilege of earning or receiving income in this State. The Due
Process and Commerce Clauses of the Federal Constitution limit the power of Illinois to subject
foreign taxpayers to Illinois tax. The Due Process Clause requires that there exist some minimum
connection between a state and the person, property, or transaction it seeks to tax (Quill Corp. v.

IT 12-0029-GIL
October 5, 2012
Page 2
North Dakota, 504 U.S. 298, 112 S.Ct. 1904 (1992)). Similarly, the Commerce Clause requires that
the tax be applied to an activity with a substantial nexus with the taxing state. Id. Where any part of
a foreign corporation’s income is allocable to Illinois in accordance with the provisions of Article 3 of
the IITA, Illinois can demonstrate the connection, or nexus, necessary to subject a foreign corporation
to tax. Therefore, unless protected by Public Law 86-272, a foreign corporation is liable for Illinois
income tax where any portion of its income is allocated to Illinois. Public Law 86-272 states in part:
No State, or political subdivision thereof, shall have power to impose, for any taxable year ending
after September 14, 1959, a net income tax on the income derived within such State by any
person from interstate commerce if the only business activities within such State by or on behalf of
such person during such taxable year are either or both of the following:
(1) the solicitation of orders by such person, or his representative, in such State for sales of
tangible personal property, which orders are sent outside the State for approval or
rejection, and, if approved, are filled by shipment or delivery from a point outside the State;
and
(2) the solicitation of orders by such person, or his representative, in such State in the name of
or for the benefit of a prospective customer of such person, if orders by such customer to
such person to enable such customer to fill orders resulting from such solicitation are
orders described in paragraph (1).
Illinois construes the protection of Public Law 86-272 very narrowly. Almost any activity exceeding
the parameters of that statute will cause that protection to be forfeited. An out-of-state corporation
can lose the immunity provided by Public Law 86-272 where its activities within the state exceed the
mere solicitation standard of that law. The citation for the Illinois Department of Revenue regulation
clarifying nexus is 86 Ill.Adm.Code Section 100.9720 and can be found on the Department’s website
at http://tax.illinois.gov/LegalInformation/regs/Part100/100-9720.pdf.
Your letter states that your “Client is a managing general underwriter, specializing in the marketing,
underwriting, pricing and administration of medical stop loss insurance.” Based on the contents of
your letter, it is our impression that your Client sells insurance which is considered “intangible”
property. Activities that involve sales other than of tangible personal property (i.e. insurance) are not
protected by Public Law 86-272. This is also explained in the above quoted “nexus” regulation,
specifically Section 100.9720(c)(2)(B)(i). Accordingly, your company is liable for Illinois income tax on
all of its income allocable to Illinois in accordance with Section 304 of the Illinois Income Tax Act
(“IITA,” 35 ILCS 5/101 et seq.).
Furthermore, IITA Section 502(a)(2) requires that a corporation which is authorized to do business in
this State and which is required to file a Federal Income Tax return will be required to file an Illinois
income tax return, regardless of whether the corporation is liable for Illinois Income Tax.
As stated above, this is a general information letter which does not constitute a statement of policy
that either applies, interprets or prescribes tax law. It is not binding on the Department. Should you
have additional questions, please do not hesitate to contact our office.
Sincerely,

IT 12-0029-GIL
October 5, 2012
Page 3

Heidi Scott
Associate Counsel -- Income Tax